Net lease real estate investment trusts (REITs) use a fairly low-risk approach to owning properties, but that doesn't mean they're all low-risk investments. That said, Wall Street doesn't give W.P. Carey (NYSE: WPC) the respect it deserves, given its long history of success. Here's why that is and why you should still consider buying it, given its roughly 6% yield.
There in the beginning
W.P. Carey was among the first companies to use the net lease approach. Essentially, it buys properties from companies and then leases the properties right back to them, with the new tenant responsible for most of the operating costs of the properties they occupy. At first, that doesn't really make much sense, but it really is a win/win for both the landlord and tenant.
The tenant in this scenario is effectively able to raise cash by selling an asset while still retaining access to the property. It can use that cash for growth spending or to pay down debt. W.P. Carey gets a tenant willing to sign a long-term lease, usually with regular rent increases, and one it knows will maintain what's usually a vital business asset.
It's the same basic business model bellwethers like Realty Income (NYSE: O) use, and W.P. Carey was an early champion of the approach. However, W.P. Carey's yield is nearly 6%, while Realty Income's yield is just 4.6% or so. That's a material discrepancy, particularly since W.P. Carey has increased its dividend every year since its 1998 IPO -- more than 20 years ago.
The problem is that W.P. Carey hasn't always been a REIT. It's also in the middle of simplifying its business model. And, despite using a similar net lease approach, it does things a bit differently than most of its peers.
A complicated path
W.P. Carey started life as a master limited partnership (MLP), a fairly complex entity that can make tax time a bit more difficult. It's not that MLPs are bad, but they require a little more investment savvy to deal with, and they notably don't play well with tax-advantaged retirement accounts. This is why W.P. Carey eventually decided to become a REIT. Although this is in the past, some investors might still have lingering concerns about what is, today, a nonissue.
Only that's not the only historical complication here. At one point, W.P. Carey was also a big player in the non-traded REIT space via an asset management arm. A couple of years ago, the company decided it wanted to get out of the asset management space and focus only on its owned portfolio. It's working toward that end now, having bought one nontraded REIT it managed and merging two others into a self-managed entity. It now oversees just two nontraded REITs that it will eventually exit in some fashion, like the two above moves.
But, at the end of the day, the transition to a pure-play REIT is still ongoing. That said, asset management only accounted for $0.03 of the REIT's $1.15 per share third-quarter adjusted funds from operations (FFO). So it's really not a material contributor at this point, even though some investors might be spooked by the REIT's involvement in the nontraded REIT space.
The last thing that often keeps investors away from W.P. Carey is more fundamental to the REIT. Unlike many of its peers that specialize in just one sector, W.P. Carey prefers to opportunistically spread its bets around. Its portfolio consists of industrial (24% of rents), warehouse (23%), office (23%), retail (17%), and self-storage (5%) assets (a fairly broad "other" category makes up the difference).
Many investors prefer REITs that focus their efforts, assuming that it will improve results. Only W.P. Carey has excelled through the coronavirus pandemic, with rent collection never falling below 96%, while more focused peers like National Retail Properties (NYSE: NNN) were at times struggling to collect around half their rent rolls.
In other words, diversification appears to be working out well for W.P. Carey right now. Only that's not the full story, either, since the REIT generates around 37% of its top line from properties located outside of the United States. With material exposure to Europe (35% of total rents), some investors are worried this region's COVID-19 uptick could be a big risk. Although it might be a hindrance, so far that hasn't been the case. Meanwhile, the U.S. is facing its own uptick, so it's hard to suggest that being a domestically focused REIT is a better approach.
The Millionacres bottom line
The story here is that W.P. Carey is a bit harder for investors to wrap their heads around than most of its peers. That's a real issue but not one that should stop you from buying it. In fact, some of the added complexity (specifically diversification) could be seen as a net benefit. If you can handle the modest extra legwork to dig into the story at W.P. Carey, the added yield here compared to other big names in the net lease space is likely to be well worth your extra effort.